Australia is a federation of six sovereign states and two federal territories. It is similar in a political sense to the Dominion of Canada.

Australia was first settled by white Europeans on 26 January 1788 when the British Government established a penal colony at Sydney under the administration of Captain Arthur Phillip, RN, later to become Governor Phillip of the colony of New South Wales. On 9 July 1900, the British Parliament enacted the Australian Constitution, a constitution modelled on the US Constitution. On 1 January 1901, the Australian nation was born. The currency is the Australian dollar (AUD). Legal System Australia is a federation of six sovereign states and two federal territories. It is similar in a political sense to the Dominion of Canada, but because the Australian Constitution is based on the US Constitution, it is called a Commonwealth. This federation is based on the US constitutional model and the US concept of a division of powers – executive, legislative and judicial – but it adopts the Westminster system of executive government. This system provides for the political party having a majority of seats in the House of Representatives (or people’s House) to form and conduct the executive government. The Australian Constitution gives the Australian Parliament legislative power over only specified areas of power to the exclusion of the states. In respect of all other powers and areas of human conduct, the states have residual legislative powers. Among legislative powers left with the states is the creation and administration of trusts and deceased estates. One must look at the statute law in all six Australian states and its two territories in order to ascertain what is the law regulating the creation and administration of trusts and deceased estates. The Commonwealth Parliament has exclusive legislative power over income taxation. Like both the US and the UK, Australia has a common law system under which the courts interpret statute law and from time to time create judge-made law to supplement deficiencies in the canons of statute law. Statute laws are paramount. The common law of trusts and probate in Australia is based on British principles of trust law. Trust Creation and Administration Creation and administration of trusts is regulated by equitable doctrines which constitute judge-made principles of trust law. Trustee Acts and Trustee Companies Acts in each state regulate administration of trusts, their variation in some states, and their dissolution. Property, Estate and Probate Real property is regulated under Torrens title, or title by registration with a central registry, with some small pockets in states, other than South Australia, held under the old system, or common law, title. Administration of deceased estates and probating of testamentary instruments are regulated in each Australian jurisdiction by statute. Taxation The Commonwealth Parliament has exclusive legislative power to impose taxes on income, customs and excise. The states and territories have retained powers to impose taxes on a range of other transactions and types of property, such as land tax, stamp duties and pay-roll tax. Stamp duties and land tax have application to practitioners creating and administering inter vivos trusts and deceased estates. Trusts Australian trust law is a separate body of law within each of the six sovereign states and two territories of the Commonwealth. There are three categories of trusts. Their categorisation is determined by the manner of their creation. These are express trusts, resulting trusts and constructive trusts. Express trusts are either created for named persons (or entities or classes of persons or entities) or for stated purposes such as charitable purposes. Since the early 1970s, express trusts are the most common type of trusts used. Discretionary trusts and fixed trusts are the usual forms of express trusts. The unit trust is, in turn, the most frequent form of fixed trust employed. Since the early 1990s, the hybrid trust, another type of express trust that has characteristics of both a unit trust and a discretionary trust, has become prominent in certain areas of trust practice. A hybrid trust usually takes the form of a standard unit trust until vesting of the trust property in the beneficiaries, at which time all or part of the trust income is paid proportionately to the unit holders as a fixed income share entitlement. Usually unit holders are entitled to return of paid up capital on vesting of the trust, which is effective dissolution of the trust. Also accretions to the corpus, due to unrealised capital gains accruing before the vesting day or accumulation of undistributed income, are appointed by the trustee in the trustee’s discretion to one or more discretionary objects of the power of appointment of the corpus of the trust. In the case of testamentary trusts there is a rebuttable presumption in favour of the lex domicilii of the testator. In the case of inter vivos trusts, the choice of law depends on whether the trust is of real property or movables. In the case of a trust of movables the proper law of settlement is the law intended by the settlor and trustee to govern all matters. This intention is either expressed in the trust instrument or gleaned from the subject matter of the trust and the circumstances surrounding its creation. The validity of a trust and the choice of proper law must be made as at the date of creation of the trust. The courts will choose the system of law with which, on an objective assessment, the trust has its closest and most real connection. This selection considers factors such as situs of trust property at the date of creation of the trust, residence of the settlor, residence of trustee(s), and any choice of law made for purposes other than determining the validity of the trust, such as choice of law for determining matters associated with the administration of the trust. Where a trust comprises property which is only immovables, such as land and leasehold interests in land, the proper law of the trust is the lex situs of the trust property. Although authorities on this point are not unanimous, most authorities suggest that the proper law of trusts of mixed trust property, comprising both movables and immovables, is the lex situs of the immovable trust property. Australia ratified the Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents, which came into force in Australia on 6 March 1995. Australia is also a member of the Hague Conference which created the Hague Convention on Private International Law and recognises foreign judgments which are executed in Australia in accordance with the terms of that Convention. Creation of a Trust All Australian states and territories rely on English trust law principles for ascertaining requirements for the valid constitution of a trust, which has four essential requirements: trustee, beneficiary (also called a cestui que trust), trust property, and trust obligation. Express trusts over real property must be in writing in order to be enforceable, although where the trust is not evidenced in writing, the trust will be enforced as a resulting trust where it is established that the beneficiary provided the source of funds for trustee acquisition of the trust property. Express trusts over personal property are enforceable, whether or not made in writing. Express trusts created inter vivos are ordinarily created by settlement of a nominal sum of money. Additions to trust property are then made by either transferring property in specie to the trustee, thus attracting a stamp duty liability where the property acquired is dutiable property for stamp duty purposes or providing the trustee with funds to acquire the property for the trust, which will also attract a stamp duty liability where the property acquired is dutiable property for stamp duty purposes. Testamentary trusts created by will or codicil usually involve gifting of property directly to the trustee and rarely involve the settlement of a nominal sum of money on the trustee with provision for additional estate property to be transferred to the trust at a later date. The reason for this is that transfer of property to the trustee of a testamentary trust by a deceased person in that person’s will or codicil is stamp duty exempt, whereas post-death transfers of property, from a trust under a will to a post-death testamentary trust, attract stamp duty liability where the property acquired is dutiable property. The duration of a trust is limited in all jurisdictions in Australia, except South Australia, by the common law rule against perpetuities or remoteness of vesting, modified by statute to allow a settlor to select a period not exceeding 80 years instead. This rule has been abolished in South Australia. Generally speaking, the death of an income beneficiary or the coming of age of a beneficiary limits the term of most trusts. Charitable trusts are not subject to this rule and can continue indefinitely. There is generally no restriction on the period allowed for accumulation of income in most jurisdictions other than those that relate to perpetuities. A trust is terminated by any of the following methods: • pursuant to termination clause in the trust instrument • at the request of all the beneficiaries who are all of full capacity and who represent the entire beneficial interest – the rule in Saunders v. Vautier • by order of the court, or • in accordance with the terms of the trust (e.g. the death of the income beneficiary or coming of age of a beneficiary or other vesting circumstance or date). Basic common law and equitable propriety rights are available to all beneficiaries, other than those of a discretionary trust. Depending on the class of the beneficiary, that beneficiary has a beneficial ownership in the subject matter of that beneficiary’s interest. Normal rules of consent, concurrence, release, acquiescence, and laches apply in all jurisdictions. There are statutory restrictions on the ability of trustees to make advancements to beneficiaries. The trustee must take into account the needs and circumstances of all beneficiaries in order to act prudently. Trustees are appointed pursuant to the trust instrument, under statutory powers of the relevant trustee legislation, or by the court. Trustees are discharged by one of the same three methods. A person appointed as trustee may disclaim the trust but must do so before taking any step in respect of the trust. Powers of trustees are conferred from the same three sources. The practice is to provide trustees with the broadest set of powers possible. The duties are the standard common law duties. A trustee is liable for any breach of trust, whether it is active or passive. If the breach results in a loss for the trust, the trustee is personally liable. The trustee has a right of indemnity to be reimbursed from the trust funds for moneys expended and liabilities incurred on behalf of the trust. Generally, the equitable rule applies that a trustee cannot be remunerated for carrying out the role of trustee. However, the trust instrument can provide for such remuneration, or the trustee can come to an agreement with beneficiaries of full age and capacity that the trustee be paid, or the court can order that the trustee receive remuneration. The role of ‘protector’ is relatively uncommon in Australian jurisdictions, although within the terms of the trust agreement there can be the role of ‘appointor’ or of an ‘advisory committee’, which attempt in varying degrees to fetter the trustees in the exercise of their role, duties, and powers. Unless there is specific direction that a trustee must heed the direction of a third party, a trustee is free to exercise discretion unfettered. All jurisdictions have created a Public Trustee (State Trustee, in Victoria), who acts as executor and trustee, fulfils a variety of public functions such as trustee of last resort and executor of small estates, and has responsibility for unclaimed moneys. The Public Trustee had a traditional role in managing the affairs of people unable to manage their own financial affairs because of mental or severe physical disability. However, this role has been reduced because it now has been extended to private trustee companies. Each jurisdiction has established some form of statutory guardianship and administration board or tribunal (e.g. the Office of Protective Commissioner, in New South Wales). The function of these bodies is to protect the interest of people who are unable to manage their own affairs because of mental or severe physical disability. Also, the boards oversee the conduct of attorneys under enduring powers of attorney. They are responsible for the appointment of guardians to administer life-style issues on behalf of such people. It is the fundamental duty of a trustee to adhere rigidly to the terms of the trust. The management of the trust must be conducted with the understanding that a beneficiary may compel performance of the trust or approach the court for determination of questions of construction and administration. For trustees of deceased estates, regard must be taken of not only the relevant trustee legislation in each state but also the relevant property law statutes in each state that control devolution of real property by testamentary succession. A trustee is under a positive duty to preserve trust property, and against this duty must resonate the trustee’s power to invest, duty to carry on business, if relevant, and hold trust property for the relevant beneficiaries, either immediately or in succession. While the general position prevails that a trustee is under an absolute duty to pay and transfer the trust property to the person properly entitled to it, there are exceptions that allow waste or diminution of trust property and assist in the discovery and ascertainment of claims on the trust property. Provisions exist in each state for the protection of trustees when distributing trust property after advertising for claims. Trustees must act impartially between beneficiaries, particularly in the apportionment of income and capital across the interests of life tenants and remaindermen. In administering a discretionary trust, there must first be certainty of identification of the relevant beneficiary before distribution is undertaken. Modern trust deeds normally used in Australia contain provisions which assure this result. Trustees are under a duty to act personally in administration of the trust. However, the duty of a trustee not to delegate duties or powers has allowed some separation between management and administration of the trust, particularly in relation to out-of-jurisdiction assets, employment of agents and attorneys and undertakings of purely ministerial acts. For example, in Trustee Act NSW 1925 a trustee has express powers to change certain administrators of trust property, subject to the trust instrument. Succession of trustees is usually prescribed by the trust instrument itself and is otherwise under supervision of the court. The creation of guardians or appointors to the trust may require the agreement to a change of trustee. The trust instrument may also prescribe other controls to the change of administration of the trust. The trustee of a testamentary estate is under a duty to account to the court, at election of the court, the trustee or on application by a beneficiary. This accountability derives from appointment of executors and trustees as a result of the Grant of Probate by the court. In an inter vivos trust, a duty of the trustee is to account to the beneficiary, requiring adherence to the duty to keep and render proper accounts. The scope of this duty to keep accounts is normally set out in the trust instrument. The requirements of a trustee to file tax returns require the trustee to adhere to the record-keeping and reporting requirements of the Australian taxation office. In all states other than South Australia, the relevant trustee legislation provides that a trustee may unilaterally have an audit taken of the trust by a person carrying on the business of an accountant and, in so doing, render certainty in the form and substance of the accounts of the trust. The court has no inherent power to vary the terms of a trust. Variation of the terms of a trust may be authorised by the trust instrument, beneficiaries, statute or the court. Any proposed variation of a trust should be assessed by the trustee for stamp duty, Goods and Services Tax (GST), or capital gains tax consequences, so that any impact of the change on the extent of trust property may be assessed and appropriate authorisations sought. Trustees are accountable to beneficiaries for adherence to and performance of the terms of the trust. The trustee is under a positive obligation to inform a beneficiary of the amount of the trust property, the mode of investment of trust property, and the existence and content of trust documents. Property, Estate and Probate In most jurisdictions, subject to provisions regarding privileged wills, the law requires persons making wills to adhere rigidly to certain formalities at the time of execution of a will. In all jurisdictions the court has the power to grant probate even where the will does not fully satisfy the formal requirements. This power may be exercised in the following circumstances: • in Queensland, if the purported document evidences the intentions of the testator, and the document complies substantially with the formal requirements of the state, and • in all other jurisdictions, if evidence exists that the proposed document represents the testator’s intentions. The requirements for the execution of a valid will are: • document must be in writing • document must be signed by the testator • execution of the document or a later acknowledgement by the testator must be witnessed by two or more witnesses present at the same time, and • there must on the face of the document be evidence by signature of the intention that the testator intends to give effect to the document. In most jurisdictions, a gift to a beneficiary is void where the beneficiary or the beneficiary’s spouse witnesses the will. In such circumstances the will as a whole remains valid, but the gift to the beneficiary will be voided unless all persons who have taken an interest under the will consent to the disposition or if the court is satisfied as to the propriety of the execution of the document. Marriage of the testator automatically revokes that part of the will granting a gift to the former spouse. In some Australian jurisdictions, termination of the testator’s marriage revokes any gift or gifts to the former spouse, unless certain exceptions apply. These exceptions vary by jurisdiction but include, for example, where a gift to the former spouse is contained within a codicil made subsequent to the termination of the marriage, or where there is evidence that the testator intended the former spouse to benefit despite termination of the marriage. A will may also be revoked by a conscious decision of the testator to revoke the will. This may be effected by: • executing a later will expressly providing for the revocation of the earlier will • the testator (or another person in the presence and at the direction of the testator) physically destroying the will with the intention to revoke it, or • a written declaration by the testator that there is an intention to revoke a previous will. A revoked will may be revived in limited circumstances, either by re-execution of a revoked will, or by execution of a codicil expressly reviving a revoked will. Certain dependants may apply to the court for provision out of a deceased’s estate. The prerequisites for standing and the exercise of the court’s discretion are complex, and require thorough review. An estate of a deceased person may be wholly or partially intestate. A total intestate estate occurs if the deceased: • dies without having executed a valid will • made a will which cannot be admitted to probate as its execution was obtained by duress, coercion, undue influence, or • lacked testamentary capacity. Intestacy may also arise by the operation of the doctrine of forfeiture. This doctrine prevents a person named as a beneficiary in a will, or who is entitled to an interest in an estate arising from the rules of intestacy, from receiving an interest in an estate of a deceased person if they are criminally responsible for the death of the deceased. If a death occurs in these circumstances, any gifts to the person criminally responsible for the death are forfeited. Forfeited gifts either fall into the residue of the estate or are administered in accordance with the rules of intestacy. A partial intestacy occurs if part of an estate is effectively disposed of by will, but a portion fails to vest in a beneficiary for whatever reason. The usual circumstances which create a partial intestacy are poor drafting, a beneficiary predeceasing the testator, or the operation of the doctrine of forfeiture. Different rules apply, depending on when the deceased person died and whether the deceased person is survived by a spouse but no issue, by a spouse and issue, by issue and no spouse, or by siblings or ascendants. The term ‘spouse’ in some states includes a common law spouse and a same-sex partner. In circumstances where the deceased is survived by a spouse but no issue, the spousal entitlement constitutes the whole estate after the payment of estate debts. Where the deceased is survived by a spouse and issue, if the estate does not exceed the ‘prescribed amount’ (excluding household chattels), the spousal entitlement is absolute. Where the value of the estate exceeds the prescribed amount, spousal entitlement consists of the household chattels, the prescribed amount, and one half of the residue. The remainder of the estate is held on statutory trust for the deceased’s issue. In some states, a spouse also has the right to the benefit of the matrimonial home if it constitutes part of the deceased’s estate. In some states, where a person dying intestate leaves a spouse and a common law spouse, if the common law relationship existed for two years prior to the death, the common law spouse will take, but if the relationship has not been in existence for two years, the spouse will take. Where a person dying intestate is survived by issue but by no spouse, the entire estate is held in statutory trust for the issue. Where an intestate is survived by no spouse (including common law spouse) or issue but is survived by one or both parents, the estate is held in trust for the parents absolutely if they are both surviving, but to the surviving parent absolutely if only one parent is then alive. Where a deceased person is survived by no spouse, issue or parent, the estate is held for the following categories of persons in descending order living at the time of death of the intestate: siblings, grandparents, and aunts and uncles. Where a person dies intestate, and is not survived by any relative delineated in the categories, the whole estate will pass to the Crown bona vacantia. If there are special grounds, which indicate that a concessional payment should be made to some person to whom the deceased would have been likely to make provision if a valid will had been executed, the Crown has discretion to surrender the entitlement in favour of this person. A payment of this nature is made only in extenuating circumstances. The only other claims which can actually be made against the estate, other than claims by creditors, are those claims made pursuant to the Family Provision Act (FPA) by eligible persons. The usual factors which the court examines to determine if a domestic relationship exists at the time of death are: duration of relationship, the nature and extent of a common residence, existence of a sexual relationship, financial arrangements and mutual fiscal support, common ownership of property, procreation of children, care and support of children, the commonality of household services, mutual commitment and support, and attitude expressed in public. A Grant of Probate or Letters of Administration must be made where the assets are located. Executors who obtain a Grant of Representation in another state or jurisdiction must either obtain a Grant of Probate within the jurisdiction, or, in circumstances where a Grant has been made in a Commonwealth country, a Grant of Re-seal of the earlier Grant, for example, if a deceased person has assets in the UK and Australia, the Grant made by the High Court of England needs to be re-sealed in Australia. A foreign Grant of Representation does not confer any authority on the executor to whom a Grant has not previously been made to deal with assets in the jurisdiction. This process can prove an expensive exercise if the deceased person has assets in more than one jurisdiction. As a matter of practice, if a deceased person owns assets or has funds deposited in any financial institution with a value of less than AUD10,000, financial institutions will usually permit the executor to deal with the assets without obtaining a Grant of Re-seal or a further Grant. It is usual for the financial institution to request the executor of the foreign Grant to provide the institution with a release and indemnity in consideration for the release of those assets. Although this process may be commercially expedient, in practice it would be difficult for the bank to enforce an indemnity against an overseas executor because of the legal costs. g. Protected Estates (Missing Persons) Act (NSW) 2004. This legislation is significant but it is available only to ‘missing’ New South Wales residents. The legislation gives the Court jurisdiction to manage and protect assets of persons missing for at least 90 days pursuant to the Protected Estates Act (PEA). If the preliminary jurisdictional point is satisfied, namely, that a New South Wales resident has been missing for 90 days, the Supreme Court of New South Wales has jurisdiction to declare that a person is a ‘missing person’ and order that the whole or part of their estate be subject to management under the PEA. The Court has jurisdiction where the person’s usual place of residence is in the state of New South Wales. Applications for a declaration and order may be made by a spouse, relative, business partner or employee of the person, the Attorney General, the Protective Commissioner, or any other person who has an interest in the estate of the missing person. Taxation Australia’s income tax legislation is contained in two statutes, the Income Tax Assessment Act, 1936 (1936 Act) and the Income Tax Assessment Act 1997 (1997 Act). The 1997 Act is a re-write – in modern language and using modern taxation law concepts – of about one-half of the 1936 Act. The un-rewritten part of the 1936 Act operates in tandem with the 1997 Act. The enactment of the 1936 Act was the product of the surrender of the income taxing powers of the Australian states to the Commonwealth, with the result that Australia has only one income tax, and that is a tax imposed at Federal level. The un-rewritten parts of the 1936 Act have been extensively amended over the last 20 years under successive Australian governments to keep the Australian tax system in pace with the tax systems of its principal trading partners, and in line with recent developments in other Organisation for Economic Co-operation and Development (OECD) income tax systems. In 1985 Australia introduced a capital gains tax (CGT). The Australian CGT regime taxes worldwide capital gains of Australian residents and capital gains of non-residents who dispose of an asset having the necessary connection with Australia. The CGT regime re-characterises net capital gains (capital gains less capital losses) of a taxpayer as income of the taxpayer and imposes income tax on it. In 1991, a controlled foreign corporation (CFC) system and a transferor non-resident trust regime were introduced, followed by a foreign investment fund (FIF) system in 1992. These new regimes, which have a direct impact on the Australian tax treatment of certain trusts, are discussed below. Australia has one of the longest and most complex tax legislations in the world. Australia’s CFC regime is substantially based on the US tax model. The Australian tax system taxes income when it is ‘derived’, irrespective of whether it has been physically received by the recipient or paid by direction on the recipient’s behalf to a third party. The Australian tax system taxes the worldwide income and capital gains of all its residents, regardless of the source of the income, subject to a foreign tax credit system and tax treaty relief where a double tax treaty (DTT) is in force between Australia and the source country. The Australian tax system also taxes the Australian source income of all non-residents, including the capital gains derived by non-residents from a category of CGT assets treated by the 1997 Act as ‘having the necessary connection with Australia’, a term of art defined in tabular form in the 1997 Act, which include, among others, land in Australia, a CGT asset used to carry on business through a permanent establishment in Australia, shares in an Australian resident private company, non-portfolio interest in an Australian resident public company, interest in a resident Australian trust estate, and trust units, options, and securities. It should be noted that in the 2005 Federal Budget, proposed changes to the definition of ‘necessary connection with Australia’ were announced effectively resulting in Australian CGT only applying to real property type assets (including rights associated with land such as mining rights) for non-residents. Beneficiaries of trusts are taxed on the share of trust ‘net income’ to which they have a present entitlement in the particular year of income as a matter of trust law, irrespective of whether they actually receive a physical distribution of the trust income. Where no beneficiary is entitled to any part of the net income of the trust, the trust itself is liable for tax on the trust net income where the trust income is sourced in Australia or where the trust is a resident Australian trust estate. In 1985, when the CGT regime was introduced, assets acquired before 20 September 1985 were treated as being pre-CGT assets, exempt from CGT until sold, gifted or otherwise transferred to another owner, at which time they become CGT-assets subject to the CGT regime. The CGT regime treats the excess of the disposal consideration for a CGT asset or, where there is none, the asset’s market value at disposal date, less its cost base as capital gain which, after being netted off against the taxpayer’s capital losses, becomes a net capital gain included as taxable income of the taxpayer. Resident Australian taxpayers are entitled to a credit for the lesser of, on the one hand, the foreign tax paid by the taxpayer on foreign source income less any tax relief available in the source country and, on the other hand, Australian tax payable on that income. The company tax rate (including that of Australian resident corporate beneficiaries of trusts which are presently entitled to trust net income in the year of income) in Australia as from 1 July 2001 (i.e. year ended 30 June 2002 and subsequent income years) is 30 per cent. The 1936 Act contains the general anti-avoidance rule (GAAR) for the Australian tax regime. In addition, there are specific anti-avoidance measures. Application of the GAAR rule by the Australian Revenue (Australian Taxation Office, or ATO) involves objective determination that a party, not necessarily the taxpayer, entered into a ‘scheme’, broadly defined, for the dominant purpose of enabling a taxpayer to obtain a ‘tax benefit’ – defined to include not only the non-inclusion of an amount of income in the taxpayer’s assessable income for tax purposes, but also the securing of a deduction for an outgoing or expense, which would not have otherwise occurred under a hypothetical alterative transaction which the party or parties concerned could reasonably be expected to have entered into but for their entry into the subject scheme. The Australian tax system assesses tax based on a 12-month income year which, in the absence of an election being made to change the tax year (which in any event must be a 12-month period starting at the end of the previous 12-month period), commences on 1 July and ends on the following 30 June. Tax returns must be filed by 31 October following the end of the tax year unless a taxpayer’s tax return is being filed by a registered tax agent, in which case the tax return is due for filing with the ATO in accordance with the tax agent’s filing programme. Tax returns can be filed electronically by the due date for filing, subject to a hard copy signed by the taxpayer being filed with the ATO in due course after the due date for filing. Australian resident taxpayers are taxed on worldwide income and capital gains regardless of source. They are entitled to a credit for the lesser of, on the one hand, the foreign tax paid by the taxpayer on foreign source income less any tax relief available in the source country and, on the other hand, Australian tax payable on that income. The Australian foreign tax credit (FTC) regime includes a credit for withholding taxes paid in source countries. Expatriate Australian taxpayers’ taxation treatment in Australia depends on residency status. If they lose their Australian residence then they are taxed only in the country of their residence and cease to be taxed as Australian residents on worldwide income and capital gains. Foreign national expatriates living in Australia are also taxed based on their residency status. If the foreign nationals acquire Australian residence then they are taxed in Australia on their worldwide income and capital gains. Australia has a 183 days rule for foreign national expatriates which deems them to be non-residents, and hence taxable only on their Australian source income if they are physically present in Australia for less than 183 days of a particular year of income. Non-residents are taxable only on Australian source income, of which passive income such as dividends, interest and royalties is taxed by a withholding tax system. Where there is a DTT in force, withholding tax is imposed at treaty rates, and the non-residents must look to their country of residence to claim FTC for Australian tax paid on their Australian source income. Australia is a party to DTTs with most major trading partners and OECD member states. The standard Australian DTT is based on the OECD Model Double Tax Convention on Income and on Capital. Australian DTTs all include the model OECD business profits article, which limits Australian source country taxing rights to the income of an enterprise carried on in Australia through a permanent establishment in Australia. Australian DTTs generally limit the Australian tax on interest and royalty income sourced in Australia to ten per cent of the income derived, and the limitation on the Australian tax payable on dividend income derived by non-residents from Australian resident companies ranges from five per cent to 25 per cent of the dividend payable to the non-resident shareholders, depending on the terms of the individual DTT. In Australia, beneficiaries are taxed in Australia rather than the trust itself. The test of whether there are beneficiaries who are ‘presently entitled’, as a matter of trust law, to all the income of the trust at the end of the income year is the test applied to determine who is liable to pay tax on the net income. Individual beneficiary taxpayers are taxable on their share of the net income of the trust at the tax rates listed above under the heading ‘5. b. ii. Rates and tax incentives’. Trustees are only liable to pay tax on the net income of the trust where there are no ‘presently entitled’ beneficiaries at the end of the taxation year. In this situation, trustees are taxable at the highest marginal rate of tax (plus Medicare levy), which is 48.5 per cent, without any graduation of tax rates or the benefit of the tax-free threshold where the trust is an inter vivos trust. Where the trust is a testamentary trust, the trust is taxable on the net income of the trust with benefit of the tax-free threshold and graduated tax rates. The Australian tax system places no relevance on duration and termination of trusts. It makes no attempt to penalise by imposing higher rates of tax than would otherwise apply where trusts are of a long duration. However, where a trust instrument requires, or a trustee decides under a power of appointment or discretion to implement, an accumulation of the net income of the trust in the hands of the trustee (regardless of whether it is capitalised and becomes an accretion to the trust corpus), the trust will be taxed on the net income of the trust, because in that situation there are no presently entitled beneficiaries in respect of the trust net income. This will result in the trust being taxed on all of the accumulating net income of the trust at the highest marginal tax rate, but applied as a flat tax rate, of 48.5 per cent of the net income of the trust. In 1991, a transferor trust regime was introduced into the Australian tax system. This regime essentially attributes to Australian resident taxpayers income and capital gains of non-resident trust estates where the resident taxpayers have transferred either property or services to the trustee of a non-resident trust or where they control the non-resident trust, irrespective of whether the income or capital gains of the non-resident trust are ever distributed to the resident taxpayer, who need not even be a beneficiary of the trust in order to have attribution in Australia of the trust income. Furthermore, in the early 1990s, the foreign investment fund (FIF) regime was introduced. Under the FIF regime, taxpayers with an associate-inclusive control interest in an FIF (i.e. a foreign company or foreign trust) and an interest in the income of the FIF (FIF income) are deemed to have their share of the accrued FIF income (i.e. the foreign source income of the FIF deemed to have accrued to the taxpayer under the FIF regime rules on an annual basis), irrespective of whether this trust income is ever distributed to the taxpayer in Australia. Taxation of Estates There is no Federal Australian estate duty or death duty nor any Federal Australian gift tax or gift duty. Some states and territories have estate and death duties, but these estate and death duties no longer apply to deceased estates where, in most cases, the deceased person has died within the last 20-23 years. Estate and death duties no longer play a part in the estate planning methodologies of trust and estate practitioners and tax advisers in Australia. On death, a taxpayer’s legal personal representative must file two tax returns under the Australian tax system. One tax return is for the income and capital gains derived by the deceased taxpayer up to the date of death. The second tax return is to recognise income of the estate from the date of death until the end of the income year in which the death occurred, which is usually 30 June following the date of death. The Australian CGT regime gives the legal personal representative and beneficiaries of the estate of a deceased taxpayer an election to defer capital gains tax liability of the deceased, under what is termed ‘the death roll-over’, on the CGT assets transmitted or gifted to them under the will or intestacy laws, until the eventual sale of the CGT assets. Where the deceased died with pre-CGT assets, the taxpayer’s death is treated as the conversion of the assets into post-CGT assets which are deemed to have been acquired by the legal personal representative or beneficiaries to whom they have been gifted as having been acquired at a cost base equal to their market value at the date of death, in order to enable calculation of the capital gain on the eventual sale of those CGT assets in the hands of the legal personal representative or beneficiaries to whom they have been gifted.